¿Martin Lewis: Heed my wealth warnings

18:15, 10 May 2010

ByManchester Evening News

I ONCE met a man with £80,000 in savings earning less than one per cent interest. While he had £80,000 outstanding on his mortgage – yet he said he was good with money. Like many, he thought being thrifty and a careful budgeter was enough.

I ONCE met a man with £80,000 in savings earning less than one per cent interest.

While he had £80,000 outstanding on his mortgage – yet he said he was good with money. Like many, he thought being thrifty and a careful budgeter was enough. As many are taught at David Brent style management training, ‘if you assume – it makes an ass of U and me!’ So here are wealth warnings based on things I’ve come across during my TV money makeovers.

Savings bigger than his mortgage. With £80,000 mortgage debt at over six per cent interest, just switching to a better deal would’ve cut £100 a month of this older family man’s costs.

The irony was he had savings for a similar amount with the same bank. The savings documents languished in a draw and showed the interest was sub one per cent – and that was prior to the scything cuts of recent years.

In other words, he lent his bank £80k at one per cent by saving and it lent him back the same cash at six per cent in the form of a mortgage.

The family cleared the mortgage with savings and was £5,000 a year better off. They reduced their costs by nearly £50,000 by the time the loan was due to be cleared.

The wider rule: Pay off your debts before saving.

The cost of debt almost always dwarfs the amount earned from savings. So clearing debts is normally the most efficient thing you can do with your cash (see moneysavingexpert.com/repaymortgage).

Missing zero per cents. As often happens in the run up to one of my makeovers, this family knew the cameras were due and started to try to sort out their own finances. It’s a bit like people who dust a house because they know the cleaner’s coming.

In this case, she had over £10,000 of outstanding loans and credit cards and applied for a new, though sadly not market leading, zero per cent balance transfer credit card. Yet the card had a £6,000 limit, and they’d only shoved £2,000 on it. She’d failed to realise they could move other card debts to it too. As they had a host of other cards at 15 per cent-plus interest, filling this up would save over £600 a year.

The wider rule: Before making new card applications utilise your existing credit efficiently. This helps to protect your credit score. Check all of your cards’ interest charges and find out if there’s room on your limits. Call up each provider and ask “will you give me a special rate if I move debts from other cards to you?” You’ll be surprised how often they say yes, MBNA and Barclaycard especially.

Even if you’re not offered a special rate, eg, you’ve one card at 16 per cent and one at 18 per cent, shift the debt from the more expensive card to fill up the cheapest card’s credit limit. If you still need more cheap credit, apply for a new deal to shift all remaining debts. See moneysavingexpert.com.balancetransfers for all the current best buys.

It’s rebuild, not market values, that count for home insurance. In the days of house price boom, one man each year at renewal proudly changed the ever-escalating valuation on his insurance form . When I arrived, his premium was well over a grand a year.

Yet it was completely wrong. For buildings cover, it’s a property’s rebuild value that counts. This is literally the amount it’d cost to rebuild a property from scratch if it’s destroyed, usually substantially less than the market value. In fact, even with his own, expensive, insurer, reinsuring at the rebuild rate slashed the cost to £250 a year.

The wider rule: Know what you need to cover and take time to value it correctly. Under covering is just as damaging as over covering. For example, if you’ve £30,000 worth of contents, but only cover £10,000, don’t assume it’ll be fine. Imagine £1,000 damage to your kitchen. While that’s within your cover limit, the insurer may check your value of contents, then only pay out in proportion to what you’ve covered, in this example a third of the value of the damage.

Yet it’s possible to get adequately covered home insurance super cheaply. The best route is combine comparison sites and check if you can get hidden cashback on top. The record result using this system is actually being PAID over £60 to get home insurance, as the cashback was higher than the policy cost. For step-by-step instructions see moneysavingexpert.com /homeinsurance

Don’t hide debts from yourself.

Families in debt often try and hide it, even from themselves. The classic way to do this is to periodically shove credit card and loan debts on to a mortgage and then consider it vanished.

In one worrying case, a family with £20,000 debts, equivalent to nearly a year of their after-tax income, told me it’d taken around a decade to build up.

That seemed slow considering their spending habits. Only later did it turn out they’d remortgaged three or four times during that period to clear debts of over £100,000. So rather than a £2,000 annual overspend, it was far closer to £12,000. And while they knew this, as it was ‘done and dusted’ it didn’t really count.

The wider rule: Persistent borrowing is a symptom of over-spending. If you have debt and it’s not from a one-off, budgeted piece of borrowing then it’s almost certain you’re spending more than you earn and that’s a critical danger sign. Keep it up and you risk a debt spiral, borrowing even more to enable you to continue your existing lifestyle and repay other debts.

The most important thing to do is a hardcore budget. This means looking far beyond a typical month’s expenditure, that misses things like the daily coffee, weekly shop, annual holidays or changing car every five years. Say you spend £600 a year on Christmas – that should count as £50 a month.

Only by doing it that way can you truly see where you stand financially and how much you need to restrain your spending. To help I’ve a free automatic tool at moneysaving expert.com/budgeting
.

Our newspapers include the flagship Manchester Evening News - Britain's largest circulating
regional daily with up to 130,485 copies - as well as 20 local weekly titles across Greater
Manchester, Cheshire and Lancashire.

Free morning newspaper, The Metro, published every weekday, is also part of our portfolio,
delivering more than 200,000 readers in Greater Manchester.

Greater Manchester Business Week is the region’s number one provider of business news andfeatures, targeting a bespoke business audience with 12,687 copies every Thursday.

Every month, M.E.N. Media’s print products reach 2.2 million adults, spanning from Accrington
in the north to Macclesfield in the south.